copyright 2008 the mcgraw-hill companies 25-1 25 the demand for resources

Copyright 2008 The McGraw-Hill Companies25-1

25The DemandFor Resources


Chapter Objectives• The Significance of Resource

Pricing• How the Marginal Revenue

Productivity of a Resource Relates to a Firm’s Demand for that Resource

• The Factors that Increase or Decrease Resource Demand

• The Determinants of Elasticity of Resource Demand

• How a Competitive Firm Selects its Optimal Combination of Resources


Turn from the product market to the resource (input or factor) market

• Roles of supply and demand are reversed: firms demand the resources, people supply them, as in the labor market

• Resource demand is a derived demand, that is, derived from the demand for the product being produced.


Why study resource markets?• Money-Income Determination: most

household income comes from supplying resources such as labor.

• Cost Minimization: resource prices are costs to a firm, and firms have an incentive to use the least costly methods of production.

• Resource Allocation: resource prices affect what resources will be used and to what extent.

• Policy Issues: often involve resource prices and related issues, tax policy, minimum wage laws, union behavior, etc.


As in product market, different kinds of resource markets

• Begin with a purely competitive resource market, price of the resource is determined by supply and demand for the resource

• What is the profit maximizing quantity of a resource that a firm should use?


Here, we assume a purely competitive resource market (and a purely competitive product market)

• Many buyers and sellers of the resource.

• Homogenous units of the resource.

• Firm is a resource price taker: their actions do not affect the price of the resource.


You already know a lot about resource markets.

• Use marginal analysis, hire the resource to the point where the added cost equals the added revenue


Marginal Productivity Theory of Resource Demand

• Marginal Product (MP): MP is the change in output that results from adding one more unit of resource, such as labor, to production.

• Marginal Revenue Product (MRP)• MRP is the change in total

revenue that results from adding one more unit of a resource, such as labor, to production


Marginal Productivity Theory of Resource Demand

Rule for Employing Resources: MRP = MRC

MarginalRevenueProduct

=Change in Total Revenue

Unit Change in Resource Quantity

MarginalResource

Cost=

Change in Total (Resource) Cost

Unit Change in Resource Quantity

Marginal Revenue Product (MRP)

Marginal Resource Cost (MRC)


MRP as Resource DemandMRP as Resource Demand Schedule

(1)Units of

Resource

(2)Total Product

(Output)

(3)Marginal

Product (MP)

(4)Product

Price

(5)Total Revenue,

(2) X (4)

(6)Marginal Revenue

Product (MRP)

01234567

07

131822252728

7654321

$22222222

$ 014263644505456

$141210

8642

]]]]]]]

]]]]]]]

1 2 3 4 5 6 70

-2

2

4

6

8

10

12

14

16

$18

Res

ou

rce

Wag

e(W

age

Rat

e)

Quantity of Resource Demanded

D=MRP

PurelyCompetitiveSeller’sDemand forA Resource


What is MRC equal to in a purely competitive labor market?

• The same as the market wage rate, that is, MRC = W (wage): recall in pure competition, the firm is a wage taker and hires a small fraction of the available labor, thus it can hire the labor it wants at the current market wage.


Resource markets

• In the previous example, if this is a labor market and the wage is $9, how many units of labor should this firm hire?

• Now make a slight change: assume a purely competition labor or resource market, but an IMPERFECTLY competitive product market (such as oligopoly, monopoly, etc) Cannot use a constant price as in previous example.


MRP as Resource DemandMRP as Resource Demand Schedule

(1)Units of

Resource

(2)Total Product

(Output)

(3)Marginal

Product (MP)

(4)Product

Price

(5)Total Revenue,

(2) X (4)

(6)Marginal Revenue

Product (MRP)

01234567

07

131822252728

7654321

$2.802.602.402.202.001.871.751.65

$ 0.0018.2031.2039.6044.0046.2547.2546.20

$18.2013.008.404.402.251.00

-1.05

]]]]]]]

]]]]]]]

1 2 3 4 5 6 70

-2

2

4

6

8

10

12

14

16

$18

Res

ou

rce

Wag

e(W

age

Rat

e)

Quantity of Resource Demanded

D=MRP(Pure Competition)

ImperfectlyCompetitiveSeller’sDemand forA Resource

D=MRP(ImperfectCompetition)

W 25.1


Market Demand for a Resource• The market demand for a resource is the

horizontal sum of the MRP curves for all the firms using that resource. What causes this demand curve to shift?

1. Changes in Product Demand and product price

2. Changes in Productivity of the resource, which is affected by

• Quantities of Other Resources• Technological Advance• Quality of Variable Resources


Market Demand for a Resource3. Changes in the Prices of Other Resources

– Substitute Resources• Substitution Effect: the lower price of

one resource encourages firms to use more of that resource and less of others

• Output Effect: the lower price of one resource lowers overall costs, which encourages the firm to produce more output, which requires more of all resources.

• Net Effect: combines both the substitution and output effects.

– Complementary Resources


Occupational Employment Trends

10 Fastest Growing U.S. OccupationsIn Percentage Terms, 2004 - 2014

Home Health Aides

Data Communications

Analysts

Medical Assistants

Physician Assistants

Software Engineers,

Applications

Physical Therapist

Assistants

Dental Hygienists

Software Engineers,

Systems

Dental Assistants

Personal Home Care

Aides

Occupation

EmploymentThousands

of Jobs

2004 2014Percentage

Increase

624

231

387

62

460

59

158

340

267

701

974

357

589

93

682

85

226

486

382

988

56%

55%

52%

50%

48%

44%

43%

43%

43%

41%

10 Most Rapidly Declining U.S. Occupations

In Percentage Terms, 2004 - 2014

Meter Readers, Utilities

Textile Machine

Operators

Credit Authorizers,

Checkers, & Clerks

Railroad Brake, Signal,

& Switch Operators

Mailing Clerks

Sewing Machine

Operators

Telephone Operators

File Clerks

Computer Operators

Photographic Pro-

cessing Machine

Operators

Occupation

EmploymentThousands

of Jobs

2004 2014Percentage

Increase

50

148

67

17

160

256

39

255

149

54

27

81

39

11

101

163

25

163

101

38

-45%

-45%

-41%

-39%

-37%

-37%

-36%

-36%

-33%

-31%

Source: Bureau of Labor Statistics


Elasticity of Resource Demand

• What factors affect Erd?

1. Ease of Resource Substitutability

2. Elasticity of Product Demand

3. Ratio of Resource Cost to Total Cost

Erd =Percentage Change in Resource Quantity

Percentage Change in Resource Price

O 25.1


Optimal Combination of Resources

• The Least-Cost Rule

–Least-Cost Combination of Resources

Marginal ProductOf Labor (MPL)

Price of Labor (PL)

Marginal ProductOf Capital (MPC)

Price of Capital (PC)=


Optimal Combination of Resources

• The Profit-Maximizing Rule

MRP (Resource) = P (Resource)

• Profit Maximizing Combination of Resources

MRPL

PL

MRPC

PC

= = 1

MRPLPL = MRPCPC =and

W 25.2


Marginal Productivity Theory of Income Distribution

• Inequality

• Market ImperfectionsO 25.2


Input Substitution:

• Banks Using More ATMs at the Expense of Human Teller Jobs

• Consistency With Least-Cost Combination of Resources

• ATMs Debut About 35 Years Ago• Today Nearly 400,000 Perform About

11 Billion U.S. Transactions• 80,000 Human Tellers Eliminated

Between 1990 and 2000• Bank Customers Gain Convenience

of More Locations While Labor is “Freed-Up” for Other Possibly Better Positions Since Teller Turnover is about 50%

Last

Word The Case of ATMs


Key Terms• derived demand

• marginal product (MP)

• marginal revenue product (MRP)

• marginal resource cost (MRC)

• substitution effect

• output effect

• elasticity of resource demand

• least-cost combination of resources

• profit maximizing combination of resources

• marginal productivity theory of income distribution


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WageDetermination

copyright 2008 the mcgraw-hill companies 25-1 25 the demand for resources

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